Disney Case Analysis

Case OverviewIt is 1984, and Disney is the target of a potential takeover by notorious greenmailer Sual Steinberg. Disney is faced with the option of fighting the takeover through the courts and media, or to repurchase Steinberg’s shares, in effect, giving in to his greenmail attempt. However, there are many other important issues which are facing Disney. These range from Disney’s abysmal return on investment in recent theme park investments, to the complete failure of Disney’s motion picture division, to Disney’s alarmingly high dividend payout rate. In the following four sections, we will address these four issues Disney faces and recommend solutions to improve the financial health of Disney.

Theme Parks IssueRecently, Disney has been following a bad investment policy. Disney invested a total of $1.9 Billion in Epcot over a 6 year period and has increased its capital expenditures on theme parks by a total of $1.277 Billion from 1981 to 1983. Despite these massive investments in its theme parks, Disney has only earned a return of 4% on Epcot and an overall return on Theme Park assets of 6% in 1983. Disney needs to find a way to more efficiently invest its capital and produce greater returns on its investments.

Analysis
In order to understand why Disney’s Theme Park investments have been so unsuccessful, we must analyze a number of different contributing factors.

Why Disney is investing in Theme Parks?
In order to understand why Disney is investing in Theme Parks, we need to take a look at the financial results of Disney’s different segments. Out of Disney’s 3 segments, Entertainment and Recreation (or theme parks) is Disney’s only segment which is nicely growing its profits in addition to attaining a healthy profit margin. Motion pictures is currently suffering, and actually losing money. Whereas, Consumer Products is producing profits and holding the greatest profit margin, however profits are not growing significantly.

After looking at this analysis and nothing else, it appears as though Entertainment and Recreation is Disney’s most profitable segment and the one which they should be investing in. This is exactly what Disney is doing.

Why are additional Theme Parks are the Wrong Investment?Before the expansion on new theme parks, Disney’s older theme parks had enjoyed much success. As recently as 1978, Disney’s Entertainment and Recreation segment had experienced a return on assets of 15.7%. However, as Disney introduced new theme parks, they reached a point where the optimal supply of theme parks had surpassed the demand. This “oversupply” of theme parks can be seen by taking a look at the United States Demographic data provided in the case.

First, it must be understood that Theme Park attendance, and in turn revenues, are driven by the younger demographic. According to the information above, the population group that drives Theme Park revenues (0 to 14 years old) is actually shrinking from 1970 to 1995. This represents a decrease in demand for Disney’s Theme Parks. Yet, at the same time, Disney is investing in and opening new theme parks. Essentially, Disney is increasing the supply despite a decrease in demand. This is counter intuitive by any economic standard.

To further back the claims that Disney’s increased investment in theme parks is a bad move; let’s quickly analyze some measures of financial performance for their theme park segment. Clearly, the Entertainment and Recreation segment has experienced an abysmal return on assets recently. These numbers are even more disappointing when considering the Entertainment and Recreation segment produced an ROA 15.7% as recently as 1978. Disney has made the wrong move in investing heavily in additional theme parks despite the population decrease in its main customer segment. In order to improve Disney’s position, it must make some changes.

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